Netanyahu was expected to soon conclude negotiations with the Yisrael Beitenu party led by Avigdor Lieberman, a far- right politician detested by the Palestinians.
Lieberman would take on the key role of defence minister under the deal being negotiated and expand Netanyahu's current majority of 61 seats in the 120 seat parliament to 66.
The move would tilt further to the right Netanyahu's government, which is already among the most right-wing in Israel's history.
Adding Lieberman's party to his coalition would bring weeks of political manoeuvring to a stunning conclusion.
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Netanyahu had earlier engaged in negotiations with Labour party leader Isaac Herzog to join the government before turning to Lieberman instead.
Defence Minister Moshe Yaalon, from Netanyahu's Likud party and a former armed forces chief, announced his resignation from the government on Friday, harshly criticising the premier in the process.
Yaalon had been at odds with Netanyahu after deputy armed forces chief Major General Yair Golan enraged the premier by comparing contemporary Israeli society to Nazi Germany.
Yaalon insisted on senior officers' right to "speak their mind."
The defence minister also found himself under fire from far-right cabinet members and their supporters over the arrest and prosecution of a soldier who shot a wounded Palestinian assailant in the head as he lay on the ground without posing any apparent threat.
Yaalon strongly criticised the soldier's actions, while the far right, including Lieberman, defended him.